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Get Better S&P 500 Diversification Using These ETFs

Apr. 11, 2018 4:38 PM ETSPDR® S&P 500 ETF Trust (SPY)CFA, EQL, EWEM, IVZ, RSP, SDOG, SPDV, XLB, XLE, XLF, XLI, XLK, XLP, XLRE, XLU, XLV, XLY22 Comments
Kurtis Hemmerling profile picture
Kurtis Hemmerling


  • The S&P 500 index is full stocks from all sectors and industries.
  • Popular index ETFs, such as the SPY, may reduce diversification by concentrating heavily on specific stocks and sectors.
  • A few alternative ETF choices are discussed and I encourage you to share your methods.

Why do many investors buy the SPDR S&P 500 ETF (NYSEARCA:SPY)?

  • Low expense ratio
  • Broadly diversified
  • Tax efficient
  • High Liquidity

This article will focus in on the topic of diversification. Is the SPY an appropriate vehicle for a well diversified fund? Some might assume that this fund would provide one-stop shopping as it contains 500 mid to large-cap stocks in all sectors. An added bonus is that the cap-weighting scheme enables lower turnover which translates into a cheap expense ratio. What more could you ask for?

S&P 500 Cap-Weighting Woes

It is important to remember that the S&P 500 is meant to represent large-cap U.S. equities and was not designed to provide investors with broad and balanced diversification. The cap-weighting scheme which helps this fund keep the expense ratio down will actually work against the quest for broad diversification.

  • Although you have 500 stocks, the largest 10 make up over 20% of the portfolios weight.
  • The smallest 10 holdings make up 0.15% weighting.
  • Sector weighting will be greatly influenced by the largest stocks.

Because the largest 50 stocks make up almost 50% of the fund, one might begin to wonder why you would even want to bother with the smallest 250 stocks which make up less than 15% of the entire funds weight. It sounds far more impressive to say you have 500 stocks in a fund and insinuates far more diversity than what you actually get.

Sector Imbalances

This Seeking Alpha article goes back to 2012 and it has some interesting visual displays on how the sector weighting has changed in the S&P 500 index. Tech weighting has a wide range between 5% - 35%.

Here is the current sector breakdown:

  • Technology 25.32%
  • Financials 17.47%
  • Healthcare 13.28%
  • Consumer Cyclicals 12.99%
  • Industrials 10.45%


This article was written by

Kurtis Hemmerling profile picture
I design sophisticated investment solutions for family offices, RIAs, UHNW individuals, ETF providers and more. I am associated with the company Portfolio123 and am working with them to increase their brand awareness.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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